The US economy is in uncharted waters as its rapid recovery from the coronavirus recession encounters new obstacles.
The April jobs report, released on Friday, showed how strong the economy has remained two years after a stunning comeback from the sharpest contraction since the Great Depression. The economy added 428,000 jobs, beating economists’ expectations as the unemployment rate was just 0.1 percentage point above pre-pandemic levels.
But the solid payrolls report capped a week of growing concern among policymakers and investors about the longer-term prospects for the US economy. The stock market suffered its worst day of losses since the COVID-19 pandemic began on Thursday, as Wall Street braced for the Federal Reserve’s daunting fight against inflation. While shares rallied amid the Fed’s rate hike on Wednesday, the market fell as investors processed the efforts the bank may have to make to lower prices — including a potential recession.
Here are five questions that will shape the course of the US economy.
Was April the post-pandemic peak for the job market?
April extended excellent US employment growth even amid rising inflation, high gas prices and a slowdown in economic growth in the first quarter.
The US has added more than 2 million jobs since the beginning of the year after hitting a record-breaking 6.5 million increase in 2021, up 1.2 million from pre-pandemic levels. The unemployment rate also remained high at 3.6 percent, although labor force participation declined slightly.
Economists expect the pace of hiring to slow as higher interest rates slow the economy and the US could fill the 1 million jobs hole created in 2020. Even so, slower job growth would still be close to pre-pandemic patterns, leaving the economy in a strong position going forward.
“We expect both growth and monthly hiring to slow to more familiar long-term trends of around 2 percent growth for the economy and a 200,000 increase in hiring as the economy develops,” said Joe Brusuelas, chief economist at the Auditing and tax consultancy company RSM.
How much should the Fed raise interest rates?
After a year of rapidly rising inflation, the Fed is stepping up efforts to curb price growth by raising interest rates at a faster rate.
The central bank increased its base rate spread by 0.5 percentage point on Wednesday, twice the rate of a typical rate hike, and Fed Chair Jerome Powell said the bank will keep going until inflation falls well down from four-decade highs .
As the Fed raises the cost of borrowing, consumers pay more interest on credit cards, auto loans, mortgages, and any loan products or debt without a fixed rate. Businesses also face higher borrowing costs and fewer profits with which to invest and expand.
The ultimate goal is to slow the economy enough to lower prices, but without causing layoffs or a recession. While Powell has expressed confidence that the Fed can do this, some economists fear the combination of a hot US economy and threats from abroad will make it impossible.
“The labor market remained strong in April. It’s both a blessing and a curse,” wrote Diane Swonk, chief economist at Grant Thornton, in a Friday analysis. “Powell was hopeful that he could derail inflation without a ‘significant’ rise in unemployment. Hope is not the same as reality.”
Will the Fed get help from supply chains?
The Fed’s main way of fighting inflation is by trying to reduce demand for goods and services, which should limit companies’ ability to raise prices further.
But there is little the Fed can do to improve the supply of goods constrained by shortages, factory closures, port shortages, COVID-19 lockdowns in China, the war in Ukraine and the slowdown in economic activity abroad.
While the Fed had hoped supply chains would normalize in time to bring down inflation, the bank has abandoned its patient approach. That means the Fed may need to reduce demand enough to offset limited supply, which would likely result in slower economic and job growth.
“It’s been a series of inflationary shocks that’s really unlike anything people have seen in 40 years. We have to see through that and look at the economy that comes out the other side and we have to somehow find price stability from that,” Powell said Wednesday.
“Of course it will be very challenging.”
When will the stock market stop selling?
The stock market has been steadily falling throughout 2022. This week the sell-off was in full swing.
The Dow Jones Industrial Average and Nasdaq Composite suffered their worst day of losses since 2020 on Thursday, while the S&P 500 Index suffered its second-worst day of the year. All three major indexes have each fallen more than 10 percent since the beginning of 2022, with the S&P down 14 percent and the Nasdaq down a staggering 23 percent.
“The market is very uncertain these days and it is difficult for many to see a positive way forward. Investors are confused (you are not alone!) and the market has become more volatile,” wrote Lindsey Bell, Ally’s chief markets and money strategist, in an analysis on Friday.
While professional investors must ride the market’s waves, Bell and other investment experts say most Americans should hold on, avoid panic selling retirement accounts, and stick to a long-term investment strategy. Individuals approaching retirement may have more difficult choices to make depending on when they want to exit the labor market and how much money they need to sustain their lifestyle.
“The uncertainties seem to outweigh the positives these days and markets may remain rocky until clearer skies prevail. The most important thing now is to stick to your long-term strategy. Sell-offs don’t last forever and market pullbacks are usually followed by eventual recovery,” Bell said.
Will consumers prevail through high prices?
Consumer spending has been steadily increasing, even after adjusting for inflation, despite rising prices for food, fuel, housing, clothing, health care, transportation and just about anything else the government can track.
Private consumption spending, a measure of consumer spending, still rose 1.1 percent in March, and although the increase was just 0.2 percent after adjusting for inflation, the resilience of consumer spending exceeded economists’ expectations.
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As the economy continues to create jobs and consumers bear the cost of inflation, some economists are more optimistic that the US can handle rising interest rates.
“With inflation remaining at 40-year highs and the Fed behind the curve on monetary policy, interest rates will continue to rise over the next few months. This further tightening is likely to continue to weigh on markets,” said Noah Williams, an adjunct fellow at the Manhattan Institute, in a Friday analysis.
“While a fabled ‘soft landing’ of slowing inflation without plunging the economy into recession may be a daunting task, today’s jobs report gave hope that there is some landing room.”
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